Steel Prices / Market Analyses

Ticks along the trendometer

A glimpse of which 2012 North American steel industry developments will have the greatest impact in the market.

Forecasts are funny things—like the weather, economic predictions might be based in heavily-researched data and strongly suggestive trends, but when it comes down to it, you could wake up on a morning the weatherman insisted would be sunny to a dark, roiling rainstorm. Likewise, members of the North American steel industry could start 2012 with a very optimistic (or pessimistic, usually depending on product and/or position on the supply chain) view of the year, only to be proven wrong well before the fourth quarter.

However, whereas price trends and demand situations for steel products can often be too general and too susceptible to unforeseen circumstances to accurate forecast, certain developments in the industry—such as announced expansions or potential partnerships—can work as starting points for plausible speculation. Although no one knows with 100 percent certainty how such developments will affect the industry, early opinions regarding, for example, how a mill capacity increase will influence supply in the area will probably be much more accurate than guesses on what prices will be like during that time. So toss aside the many “2012 Forecast” features cluttering your desk and e-mail inbox and use the following 2012 industry developments as conversation starters instead.

Production expansions

One forecasting tool that has turned out to be (for the most part) accurate is the World Steel Association’s (worldsteel) short-term outlook, which is usually published in the fall and includes estimates for current year-end apparent steel use totals plus forecasts for the following year. According to worldsteel, steel use in the US is expected to grow by 5.2 percent to 93.8 million metric tons in 2012, a modest increase in consumption compared to the 11.6 percent year-on-year jump anticipated for 2011 but an increase nonetheless.

Therefore, because it can be safely assumed that the US will consume more steel this year than it did last year, it stands to reason that import levels will rise as well. Steel import levels have been on a rising trend since the economic crisis of 2008—US imports totaled 14.7 million metric tons in 2009, 21.7 million mt in 2010, and through November 2011, totals reached over 23 million mt, according to the US Steel Import Monitoring and Analysis System (SIMA). As such, brand-new mills or expanding facilities in countries that can be counted as top sources of imported steel in the US could very well provide ample new opportunities for US steel buyers. For example, Deacero S.A., one of Mexico’s largest steelmakers, inaugurated the first phase of its new $750 million merchant bar mill in Coahuila, Mexico in December 2011 (the second phase is due to open in August 2012), with a reported 1.5 million metric ton capacity.

While the mill is not expected to necessarily implement the full capacity over the course of the year, it will offer something that other import merchant bar sources to the US do not—sizes and shapes comparable with average US mill offerings. Currently, most imported merchant bar in the US, such as from Turkey, is composed of specialty sizes and shapes that US buyers primarily use to fill up niche holes in their inventory—imports were not exactly considered “competition” to US mills. However, now that Deacero’s new mill will offer competitive products and competitive prices, some industry insiders believe that many will start looking south of the border for much of their merchant bar needs—even though this is not Deacero’s primary objective for the mill. On the other hand, most of the merchant bar produced at the mill will be fed directly into Mexico’s domestic market, according to one Midwest distributor, and while he expects that the new mill will begin offering merchant bar to the US as early as April this year, he doesn’t think Deacero will be fighting for market share in the US, and import offer prices will reflect that sensibility.

Elsewhere in Mexico, US-based companies are also gaining a foothold in the domestic and import market. Louisville, Kentucky-based steel processor Steel Technologies LLC plans to open a new flat-rolled steel processing and pickling plant in Monterrey, Mexico in late 2012. The new 300,000-square-foot facility, which cost $75 million to construct, will have a processing capacity of over 800,000 tons annually. According to Michael J. Carroll, President and CEO of Steel Technologies, the new plant reflects the company’s bullish attitude toward the Mexican domestic steel industry. “We are dedicated to bringing more value to our growing customer base in Mexico and are confident that flat-rolled steel consumption in the region will continue to expand,” said Carroll in a press release, and statistics back up his claims. In an annual report on the NAFTA-region steel industries published by the Paris, France-based Organization for Economic Cooperation and Development (OECD), Mexico’s apparent finished steel use in 2012 is expected to reach 18.1 million metric tons, a 6 percent increase from 2011 levels and a 12.5 percent increase compared to 2010 levels.

Of course, the US flats market is also expanding, with major mills branching out into new product lines. Nucor, for example, plans to complete construction at its Hickman plant in Blytheville, Arkansas in Q3 this year. The $50 million project will add a twin-tank degasser line to the hot rolled, cold rolled and pickled sheet facility, enabling the company to make products it didn’t before. According to industry insiders, Nucor is hoping this expansion will help them with their goal to move more into the value-added sector of the flats market, and take pressure off them in the lower-end, “commodity grade” product spectrum that is besieged by excess capacity from smaller, local competitors. However, this doesn’t necessarily spell a boon for those smaller companies. “Removing Nucor from the equation will force them to get capacity in check,” said an East Coast service center sales manager.

Also responding to increased demand is the US pipe market, which has seen tremendous growth in the energy sector’s development of unconventional oil and gas drilling of shale resources. Evraz Inc. North America is pouring millions of dollars into its Portland, Oregon structural tubing facility to add API pipe manufacturing capacity. Scheduled to be completed this August, the expansion will bring the mill’s total capacity up to 250,000 tons of API pipe and structural squares, rounds and rectangles, which will be ready to meet growing demand in the region. “Energy exploration in the Bakkens region and western Canada is rapidly expanding,” said Mike Rehwinkel, President and CEO of Evraz North America, “and our customers are looking for more high-quality heat-treated API pipe than we can supply from our western Canadian mills.”

Likewise, VAM USA, a subsidiary of French pipe manufacturer Vallourec, is in the process of building a new, $57 million premium threading facility in Youngstown, Ohio to serve the OCTG market. The first phase of production is scheduled to begin in mid-2012 with the operation of one line, while multiple lines will follow by the end of 2013. In fact, it is widely speculated that more US-based pipe manufacturers will announce further expansions this year to meet the demands of a country determined to shake off the shackles of foreign energy dependence.

Resource developments

While energy independence is a goal to which the US as a whole aspires, raw material independence is the dream of many North American steelmakers, which have made several moves in the last couple years to control their raw material supply. Some mills have expanded their steel scrap divisions by acquiring rival processors in strategic locations. Others—such as integrated mills—have invested in their own personal iron ore supply in order to reduce costs, such as US Steel’s Minntac and Keetac operations in Minnesota and ArcelorMittal’s Minorca mine near Virginia.

India’s Essar Group, which owns both an iron ore pellet plant in Minnesota and a steel plant in Canada (Essar Steel Algoma), is another such company. After the steel mill lost a reported C$285.9 million (US$293.7 million) in fiscal 2011, the parent company announced it would be increasing the planned capacity of its iron ore plant in 2012 by approximately 3 million metric tons. Typically, such a development would not have much impact on the surrounding steel market—even if Essar Steel Algoma reduces input costs, there’s no guarantee it will be passed onto finished steel prices. But in Essar’s announcement of the iron ore capacity expansion, it was mentioned that the company would likely have excess iron ore available to sell on the open market. Because most steel mill/iron ore producer relationships are contractually-based, sources say this means that the excess ore could go to offshore destinations. Realistically, the US iron ore export market will probably not become a worldwide power player along the lines of the US scrap export market, but every breakout industry has to start somewhere.

As it is, the world iron ore market is dominated by the three “Iron Giants”—Vale, BHP Billiton and Rio Tinto. But one of the reasons those companies have grown large enough to encompass the majority of the world’s iron ore resources is because they looked beyond their iron-rich home bases to snap up newly-discovered deposits around the globe. That doesn’t mean, however, that there isn’t room for North American mining companies to try. One of the largest deposits currently up for sale, for instance, is Afghanistan’s Hajigak deposit, which holds an estimated 1.8 billion metric tons of iron ore 81 miles (130 kilometers) from the capital city of Kabul. The Afghanistan Ministry of Mines will reportedly settle on an agreement with preferred bidders early this year, which might include US or Canada-based companies. However, aside from the offering price of the mine, a major consideration for any company looking to invest in iron ore deposits is transportation costs. Serious investment in infrastructure must be implemented to move ore from mine to port, and few mining companies are willing to undertake such a task, especially in a developing country. But considering Afghanistan’s close proximity to the Asian steelmaking market, it could well be worth it for North American miners looking to break into the international iron ore scene.

Trade opportunities

Other steel-related businesses in North America—specifically the US—looking to enhance their international presence will have a new batch of opportunities thanks to the free trade agreements passed by both houses of the US Congress on October 12, 2011. Of the three agreements, the partnership with South Korea could prove the most influential to the US steel industry, as the country has been among the top three non-NAFTA sources of steel imports to the US during the past five years. While the export market from the US to South Korea is not as strong, that could change soon. The agreement, which is the largest for the US since NAFTA, will remove tariffs on over 95 percent of industrial and consumer exports over the next five years, and the US International Trade Commission estimates that will translate into a $10.9 billion increase in exports to South Korea within the first year of the agreement’s passage.

The steel sector most likely to benefit from this agreement is flats, specifically cold rolled coil, galvanized and other automotive-related steels, considering the Republic of Korea-United States Free Trade Agreement (KORUS FTA) aims to improve market access for US auto companies in South Korea while putting in place protections for the US auto industry against harmful surges of Korean auto imports. However, any US steel industry benefits resulting from the agreement might prove to be minimal. According to an East Coast flats trader, US automotive countries are unlikely to sell their vehicles in South Korea, where ultra-compact cars are the norm. Further, US-based steel companies will not look too attractive as flat products sources for South Korean auto producers with lower-cost sources such as Japan and China right next door. “Politicians and trade-boosting steel associations are completely over-hyping the impact this FTA will have on the US steel industry,” said the trader. Nevertheless, other traders hope he is wrong, as many trading firms see the US steel export market as a mostly untapped source of enormous opportunity.

In contrast to South Korea, US exports to Colombia were already strong before Congress passed the US-Colombia Trade Promotion Agreement (CTPA) in October. Through September 2011, the US exported over 80,000 metric tons of steel products to Colombia, including close to 20,000 metric tons of semi-finished products (billets, slabs and blooms), nearly 12,000 metric tons of heavy structural shapes (beams), over 8,000 metric tons each of OCTG and line pipe, and close to 5,000 metric tons of cut-to-length plate. Under the terms of the free trade agreement, 80 percent of the duties on US exports to Colombia would be eliminated, and an additional 7 percent of US exports would receive duty-free treatment within the next five years. In total, the US ITC estimates that such eliminations will increase US exports by $1.1 billion per year. According to one Midwest trader, the US already exports most of its domestically-produced billet, and with the reduction or complete elimination of duties on billet exports to Colombia, the South American country could become a focal point for US billet producers, eventually resulting in production increases to meet Colombia’s demand.

Potential takeovers

In addition to opportunities afforded abroad, there are some domestic developments that might be of interest to North American steel companies this year. By many estimates, US corporations are sitting on a combined $3 trillion in profits gained since the economic crisis, occasionally dipping into the coffers to pay for facility expansions and/or modernizations, and taking advantage of acquisition opportunities that seem too good to pass up. One such opportunity in the US steel industry is rumored to be United States Steel Corporation, the 110-year-old industry stalwart that has, for the last several quarters, fallen behind its competitors financially (although it did finally make it back into the black in Q3 2011 after nine consecutive quarters in the red). Reports have surfaced in the last few months that due to its alleged “cheapest steelmaker in America” status (because its stocks are trading below the value of its assets), Wall Street traders are growing more convinced that someone will make US Steel an offer it can’t refuse.

However, any fellow steelmaker interested in absorbing US Steel’s enormous market share—in 2010, it was listed as the 12th largest steelmaker in the world by volume, above competitors Gerdau (ranked 14), Nucor (ranked 16), and Severstal (ranked 21)—might be deterred by the company’s “baggage.” According to financial data, US Steel has a $1.98 billion shortfall on pension benefit obligations in addition to borrowings exceeding cash by $3.64 billion.

Of course, rival steel producers are not the only corporations with potential interest in such a takeover, considering the recent trend of large financial institutions or holding companies acquiring steelmakers, such as the Renco Group, which purchased three Severstal, North America-owned steel mills in 2011 through its unit RG Steel. With larger cash reserves and an appetite for risk, financial companies could very well run the steel industry of the future, but for now, sources say the likelihood US steel entertaining any such offers is slim. “They’d have to be pretty desperate,” said an East Coast flats distributor, “and if nine quarters in the red didn’t make them desperate enough, I don’t know what will.”

Then again, some companies looking to take over a vulnerable steel operation won’t take no for an answer. Billionaire investor Carl Icahn’s recent wrangling with Commercial Metals Company has been splashed across national news headlines for months (see the News Focus on page 14 for more details). But aside from opinions on the probability of Icahn’s success in what is becoming an ever-more hostile takeover attempt, ideas surrounding the possibility of other potential bidders have hit the rumor mill. In particular, Icahn’s low $15 per share bid could attract rival steelmakers, such as Nucor or Severstal North America, according to Wall Street traders in recent news reports. Sources say Nucor might be interested in acquiring CMC because overlapping products and mill locations could translate into significant cost cuts. However, others pointed out that such a merger could make Nucor vulnerable to antitrust scrutiny, considering that the addition of CMC’s rebar division would give Nucor a 60 percent majority of the North American rebar market. Therefore, while CMC might look tantalizing to a financially-sound steelmaker like Nucor, “they’d much rather watch the company get chopped up, processed and spit out by an outsider like Icahn,” according to a Midwest rebar distributor.

Of course, all such possibilities exist in the realm of speculation for now—US Steel could very well solve its crippling debt problem and remain a self-sustaining industry giant for another 110 years and beyond, and CMC could valiantly stave off any and all takeover attempts and regain its previously strong position in the market.  Only time will tell the outcome, which should make 2012 a very interesting year for steel indeed.

Nucor Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
$159.8 million $299.8 million $181.5 million
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
1501% 416% 88% 229% -65% 674%
US Steel Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
(-)$86 million $222 million $22 million
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
189% 83% 358% 998% (-)909% 143%
AK Steel Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
$8.7 million $33.1 million $3.5 million net loss
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
109% 358% 280% 24% (-)111% 1591%
Severstal Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
$531 million $602 million
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
251% 168% 13,00% 214%
ArcelorMittal Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
$1.1. billion $1.5 billion $659 million
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
241% 72% 36% (-) 11% (-) 56% (-) 49%
Steel Dynamics Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
$106 million $99 million $43 million
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
1225% 63% (-)7% 102% (-)56% 126%
POSCO Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
$858 million $1.3 billion $215 million
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
76% (-)33 % 52% 30% (-)505% (-) 75 percent
Gerdau Net income/loss Q1 2011 Net income/loss Q2 2011 Net income/loss Q3 2011
$255 million $320 million $401 million
Change from Q4 2010 Change from Q1 2010 Change from Q1 2011 Change from Q2 2010 Change from Q2 2011 Change from Q3 2010
(-) 3% (-) 29% 23% (-)41% 42% 17%

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